ISA's or Individual Savings Account are perfect for people who wish to invest some extra cash for a rainy day. With an ISA you can have immediate access to your money and at the same time allow your funds to expand free from any capital gains tax or income tax. Basically ISA's are tax free savings accounts that are a wise additional investment on top of your traditional pension plan.
The Rules of Investing in an ISA
ISA's are open to anyone over the age of 18 and resident in the UK. You must be 18 or over to open an adult ISA. You cannot open joint account ISA's or open them on behalf of another person. All that is needed to open an ISA is a few personal details and your national insurance number.
There are maximum amounts that can be placed into ISA's each year and any income or capital gains does not have to be declared to the taxman. The tax free aspect is particularly useful to over 65s who enjoy an increased personal tax allowance.
Types of ISA
Investors in ISA's are granted an annual ISA investment allowance. By choosing the different options of a mini-ISA or a maxi-ISA you can invest your annual allowance in a range of investment and savings options.
Estimate the income tax you will pay on your pension, including your personal allowance and the 25 percent tax-free lump sum, so you know what you will actually take home.
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With a maxi-ISA you must have a stocks and shares investment where you invest your money in bonds, shares, unit, gilts, investment trusts and life insurance options. The maxi-ISA can also have an optional cash investment where you can deposit cash in banks, building societies and/or Nationals Savings with a higher rate of interest; the cash option is good for easy access to your money.
The current annual ISA allowance is £20,000, which can be split across different ISA types as you choose.
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Mini ISA
You can now open multiple ISAs of the same type with different providers within the same tax year, up to the overall £20,000 annual allowance. Mini-ISA's are good for investors who want flexibility between their investment options. However if you want to place a greater amount of your money into stocks and shares you may be better with a maxi-ISA.
Risks and Benefits
As with any investments in stocks and shares there will be a risk factor depending on you investment options; stocks can go down as well as up. You can cut your chance of a loss by using an independent financial advisor. A financial advisor will be able to guide you, and depending on your attitude to taking risks, can be either cautious or aggressive with your investment options. In terms of investment the stock market does have a potential for growth that cash deposits cannot match over the long term.
If you want to make sure your money is secure then you should think about using a cash ISA only. Your money will be safe although the returns may not be as high as the stocks and shares options.
ISA's are a good investment option on their own or when used to save some extra cash as an addition to a pension scheme. Remember to shop around and get the best rates that you can and always read the small print for restrictions including notice needed to gain access to your cash.
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